George Osborne: no let up in plan to cut deficit after AAA downgrade

George Osborne has warned there will be no let up in his plans to reduce the
deficit after Britain was stripped of its prize AAA credit rating amid
worries about weak growth and rising debt.

The Chancellor pledged that his resolve to stick to the Coalition's economic
strategy is "redoubled" following the downgrade by Moody's, one of
the biggest global credit ratings agencies, downgraded Britain.

He faced political flak, however, because he repeatedly staked his credibility
on being able to stave off the downgrade, vowing before the 2010 general
election: "We will maintain that AAA rating."

While Labour went on the attack, the party faced questions of its own after Ed
Balls, the shadow chancellor, admitted borrowing would now be higher if he
were in charge.

Mr Osborne insisted that the Coalition will not change course on the economy,
saying the downgrade made it all the more important to stick to attempts to
cut Britain’s deficit.

He said: "I think we've got a very clear message, a loud and clear
message that Britain cannot let up in dealing with its debts, dealing with
its problems, cannot let up in making sure that Britain can pay its way in
the world.

"Britain's got a debt problem. I agree with that. I've been telling the
country for years that we've got a debt problem, we've got to deal with it.

"What do they also say? That if we abandon our commitment to deal with
that debt problem, then our situation would get very much worse and I'm
absolutely clear that we must not do that."

Asked if he had broken his commitment to protecting Britain's credit rating,
he said: "I've consistently argued that Britain has a debt and deficit
problem, that we've got to tackle that head on, that we've got to take tough
measures to do that and I think people understand that.

"In the end, the test of our credibility as a country is there every day
in the markets when we borrow money on behalf of this country from investors
all around the world.

"At the moment we can do that very cheaply with very low interest rates
precisely because people have confidence that we have got a plan, we've got
to stick to that plan and we are going to deliver that plan."

Mr Balls told Radio 4's Today programme: "The economy has
flatlined. There has been no growth now for two years, our deficit is
getting bigger... the plan has not worked."

In a separate interview, on Sky News , Mr Balls called Mr Osborne a "quack
doctor when it comes to the economy."

Mr Balls insisted that the economy would be in a better condition if the
coalition had stuck to Labour's spending plans in 2010. However, he admitted
he would currently be increasing borrowing if he was in charge.

"That is what I would do right now," he said. "I would slow
the pace of deficit reduction. I would have an immediate stimulus in the
economy."

In the wake of the shadow chancellor's interview John Penrose, the
Conservative MP, demanded: "Can anyone think of a question where Ed
Balls' answer would not be 'borrow more money'? No? Me neither."

Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, said
the downgrade was "disappointing news."

However, he added: "Our credibility as a country is tested every day in
the financial markets. We continue to command very low interest rates.

Credit ratings agencies were not the "be all and end all" but "one
benchmark among many," Mr Alexander added.

Mr Osborne is braced for the Tory right to demand deeper spending cuts and
possible tax cuts to stimulate the economy and address borrowing.

Mark Littlewood, director general of the Institute of Economic Affairs, said
Mr Osborne should now take "immediate action" to cut the deficit.

"George Osborne should focus on making sufficient savings in public
spending to implement a substantial programme of tax reductions," said
Mr Littlewood.

"With the size and scope of the state in Britain at current levels it is
no wonder our economy is so fragile."

Moody's said it had acted to downgrade Britain for the first time because of
“continuing weakness in the UK's medium-term growth outlook”, the risk that
the Government will fail to hit its targets for reducing the deficit and the
UK's “high and rising debt burden”.

However, Moody’s predicted that on its current course, the UK will eventually
regain its AAA status. Any relaxation in the deficit reduction could lead to
another downgrade, it suggested.

Credit ratings assess a government’s ability to repay its loans, and can help
determine the interest rate governments pay to borrow. Britain had been
rated AAA, the highest possible rating, but is now rated Aa1, one notch
lower.

Despite its role in financial markets, the loss of the AAA rating is likely to
have more political than economic consequences.

Many economists question the credibility of the ratings agencies and say that
the importance of a country’s rating to it borrowing costs is much less
significant than in earlier decades.

The US and France have already lost their AAA ratings without seeing their
borrowing costs rise

The Treasury’s independent Office for Budget Responsibility said last year
that the loss of Britain’s AAA credit rating might not have much impact on
the public finances.

Mr Osborne said he took some comfort in the Moody’s conclusion that the UK's
basic creditworthiness remains “extremely high” because of the fundamental
strengths of the economy.

The agency also suggested that Britain will, in time, regain its AAA status.

The Aa1 rating “reflects Moody's expectation that a combination of political
will and medium-term fundamental underlying economic strengths will, in
time, allow the government to implement its fiscal consolidation plan and
reverse the UK's debt trajectory,” the agency said.

It also suggested that slowing down the deficit reduction programme could lead
to another downgrade.

“Moody's could also downgrade the UK's government debt rating further in the
event of an additional material deterioration in the country's economic
prospects or reduced political commitment to fiscal consolidation,” it said.

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